Toro 2014 Annual Report Download - page 47

costs may differ from our estimates. An unexpected increase in not the fair value of any reporting unit is less than its carrying
warranty claims or in the costs associated with servicing those amount. If we conclude that this is the case, a two-step quantita-
claims would result in an increase in our warranty accrual and a tive test for goodwill impairment is performed. In conducting the
decrease in our net earnings. initial qualitative assessment, we analyze actual and projected
growth trends for net sales, gross margin, and earnings for each
Sales Promotions and Incentives. At the time of sale to a cus- reporting unit, as well as historical versus planned performance.
tomer, we record an estimate for sales promotion and incentive Additionally, each reporting unit assesses critical areas that may
costs that are classified as a reduction from gross sales or as a impact its business, including macroeconomic conditions, market
component of SG&A expense. Examples of sales promotion and related exposures, competitive changes, new or discontinued prod-
incentive programs include rebate programs on certain professional ucts, changes in key personnel, or any other potential risks to pro-
products sold to distributors, volume discounts, retail financing sup- jected financial results. All assumptions used in the qualitative
port, floor planning, cooperative advertising, commissions, and assessment require significant judgment.
other sales discounts and promotional programs. The estimates for If performed due to impairment indicators or the amount of time
sales promotion and incentive costs are based on the terms of the since the last analysis, the quantitative goodwill impairment test is
arrangements with customers, historical payment experience, field a two-step process. First, we compare the carrying value of a
inventory levels, volume purchases, and expectations for changes reporting unit, including goodwill, to its fair value. The fair value of
in relevant trends in the future. Actual results may differ from these each reporting unit is estimated using a discounted cash flow
estimates if competitive factors dictate the need to enhance or model. Where available, and as appropriate, comparable market
reduce sales promotion and incentive accruals or if customer multiples and our company’s market capitalization are also used to
usage and field inventory levels vary from historical trends. Adjust- corroborate the results of the discounted cash flow models. If the
ments to sales promotions and incentive accruals are made from first step indicates the carrying value exceeds the fair value of the
time to time as actual usage becomes known in order to properly reporting unit, then a second step must be completed in order to
estimate the amounts necessary to generate consumer demand determine the amount of goodwill impairment that should be
based on market conditions as of the balance sheet date. recorded. In the second step, the implied fair value of the reporting
Goodwill and Other Intangibles. Identifiable intangible assets unit’s goodwill is determined by allocating the reporting unit’s fair
are amortized over their useful lives, unless the useful life is deter- value to all of its assets and liabilities other than goodwill. The
mined to be indefinite. The useful life of an identifiable intangible implied fair value of the goodwill that results from the application of
asset is based on an analysis of several factors, including contrac- this second step is then compared to the carrying amount of the
tual, regulatory or legal obligations, demand, competition, and goodwill and an impairment charge is recorded for the difference.
industry trends. Goodwill and indefinite-life intangible assets are Inventory Valuation. We value our inventories at the lower of
not amortized, but are tested at least annually for impairment and the cost of inventory or net realizable value, with cost determined
whenever events or changes in circumstances indicate that impair- by either the last-in, first-out (‘‘LIFO’’) method for most U.S. inven-
ment may have occurred. tories or the first-in, first-out (‘‘FIFO’’) method for all other invento-
Our impairment testing for goodwill is performed separately from ries. We establish reserves for excess, slow moving, and obsolete
our impairment testing of indefinite-life intangible assets, and the inventory based on inventory levels, expected product life, and
income approach is utilized for both. We test goodwill for impair- forecasted sales demand. Valuation of inventory can also be
ment at the reporting unit level. Under the income approach, we affected by significant redesign of existing products or replacement
calculate the fair value of our reporting units and indefinite-life of an existing product by an entirely new generation product. In
intangible assets using the present value of future cash flows. Indi- assessing the ultimate realization of inventories, we are required to
vidual indefinite-life intangible assets are tested by comparing the make judgments as to future demand requirements compared with
book values of each asset to the estimated fair value. Our estimate inventory levels. Reserve requirements are developed according to
of fair value for indefinite-life intangible assets uses projected reve- our projected demand requirements based on historical demand,
nues from our forecasting process, assumed royalty rates, and a competitive factors, and technological and product life cycle
discount rate. Assumptions used in our impairment evaluations, changes. It is possible that an increase in our reserve may be
such as forecasted growth rates and cost of capital, are consistent required in the future if there is a significant decline in demand for
with internal projections and operating plans. Materially different our products and we do not adjust our production schedule
assumptions regarding future performance of our businesses or a accordingly.
different weighted-average cost of capital could result in impair- We also record a reserve for inventory shrinkage. Our inventory
ment losses or additional amortization expense. shrinkage reserve represents anticipated physical inventory losses
In conducting the goodwill impairment test, we first perform a
qualitative assessment to determine whether it is more likely than
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